Do the Math

Tony Kenney and his Speedway SuperAmerica team succeed with focus on metrics, loyalty.

Murat Tokad is a Speedy Rewards member. So is David Deddens. And both men’s companies compete with Speedway Super- America LLC (SSA) on a daily basis. For them, enrollment in SSA’s popular points-based program— widely considered the seminal c-store loyalty effort with 3.2 million active members, perhaps the largest in the channel—was part competitive research, part consumer curiosity.

“I personally signed up for this program about four years ago just to experience and learn it since our organization was considering a customer- loyalty program,” says Tokad, vice president of operations for Martin & Bayley Inc. dba Huck’s Food & Fuel, a 104-store chain based in Carmi, Ill. “They have done a great job communicating this program to their customers. To this day, every time I am in a Speedway location, I get that question asked: ‘Do you have your Speedy Rewards card?’ ”

Deddens, president of two-store 3-D Mart Inc., West Harrison, Ind., usually stops at a Speedway when traveling through Cincinnati to pick up drinks and snacks for the kids.

“They have a good customer base in terms of loyalty; the program is so good that they can compete with the big ones like Kroger, Costco and [United Dairy Farmers],” says Deddens. “Seeing how well it seemed to be doing for them, we looked at getting a loyalty program, too.” It’s not often that an oil company’s retail efforts inspire independent players; despite some of the impressive concepts presented by the majors, there was always a sense that corporate was playing around with retail, while its heart was set on upstream riches.

But for Enon, Ohio-based SSA, its position as a small slice of $54 billion in revenues for integrated oil Marathon Oil Corp.—think low-single-digit share of operating profits, according to some estimates— provides the fire to continuously grow, control costs and, as in the case of Speedy Rewards, innovate like mad.

During an exclusive interview with CSP, SSA’s top officials shared a story of a business driven by a passion for facts, not gut; for what the customer truly wants, not what officials think the customer wants. All decisions are empirical and examined by a senior team that averages more than 20 years of experience.

“We’re a small part of Marathon overall,” says SSA president Tony Kenney during a January interview at the company’s campus. “You have to continually demonstrate your ability to earn the expected return on capital you’re given to invest in the business.”

And SSA has been making the case. Marathon’s president and CEO, Clarence P. Cazalot Jr., highlighted the retail chain as a downstream “bright spot” during the third-quarter 2009 earnings report as refining margins continue to get hammered. Indeed, SSA enjoyed 11.4% same-store sales growth inside the store in 2009 and a 1.1% bump in same-store gasoline sales.

As SSA seeks to continue its momentum in the morass of economic recession, Speedy Rewards will of course play a major role. But the driver will be an emphasis on consistency— a Herculean task for a 1,600-store chain with about 800 different footprints.

“It really comes down to executing every day, the friendliness of our CSRs, how we treat people, the cleanliness of the stores, how well they’re stocked, maintained, faced and fronted,” says Kenney. “All of the elements that make you a good retailer, making sure they’re consistent across 1,600 stores, is really the opportunity I see.”

CALCULATING ‘THE MATH’

With $3.1 billion in merchandise and 3.2 billion gallons of fuel sold, SSA has had a productive past year. Through third quarter 2009, SSA’s merchandise sales averaged $164,000 per store per month.

The no-nonsense trappings of a typical Speedway or SuperAmerica site belie such stellar numbers. While the stores are neat, efficiently laid out and have powerhouse categories front and center, they are by no means flashy.

“They’ve rebuilt some stores and upgraded the presence, but it’s a pretty basic package,” says Rob Razowsky, CEO of six-store chain Rmarts LLC, Deerfield, Ill., which indirectly competes with SSA through its management of some Shell sites. “They’re not doing the kind of stuff Circle K is doing with the big fountain. There’s not the big splash and pizzazz you see other folks doing.”

But in SSA’s worldview, pizzazz does not necessarily add up to profits. Rather, it’s being efficient in spending marketing dollars and controlling expenses that make the math work. “We’ve got to be able to recognize trends and where the deficiencies will be, and understand where growth is going to be,” says Glenn Plumby, SSA’s newly appointed vice president of operations and a 29-year veteran of Marathon.

“It’s one thing to recognize that fact, and another thing to position a 1,600-store chain with 800 footprints to achieve that,” he continues. “That’s where we have to be ahead of the game as far as space allocation, SKU rationalization, on the math, to make sure our stores are transitioned to customers’ needs.” That phrase—“the math”—is a passion for SSA, one sparked when Kenney took the helm in 2005. All decisions— placement of a new item, whether to partner with a supplier on a promotion, or the timing of store deliveries—must be supported by it.

“That’s how we maintain our edge,” says Plumby, who is among the many SSA senior executives with a finance background. “The math at the category level is what’s important, and math at the store level is important, and it’s profitability per square foot.”

Thus, slotting fees have no sway in the cold vault. Rather, space to sales rules the plan-o-gram, thanks to the retailer’s proprietary cold-vault optimization program, which analyzes cooler sales to optimize ordering on a store-by-store basis.

“It’s all about what the consumer wants,” says Plumby. “We have 1,600 cold vaults and we have 1,600 plan-o-grams for cold vaults.” It’s a conscious move the retailer made about five years ago, to focus on the SKUs that drive the business. While it may have sacrificed upfront slotting monies in the short term, SSA has maintained the dollars through promotions. Packaged-beverage unit and dollar sales are outpacing the market, according to Plumby. And it’s an approach that the retailer plans to recreate throughout the rest of the c-store.

Another example of this profitsover- rebates mentality can be found in SSA’s clean-floor policy, which began about six years ago. While the company has a certain number of power wings in each store, it does not use shippers.

“We felt those displays were blocking the visibility of the food, coffee, fountain and roller grill,” says Plumby. “If you look at the total profitability of those shippers … it just was not the right thing to do for us. Sales of those products continued to grow, even after we removed the shippers, and that’s because we did a lot better job inline with their products, we’re in stock and it’s just presented a lot better.”

PLAN FOR SUCCESS

This math-focused approach isn’t necessarily built for speed; it requires a great deal of planning ahead and ensuring that each participant in creating the final store product is involved from development through execution. The marketing division’s planning for 2010 began in May and was finalized by September 2009. That means programs completed, the calendar set, advertising programs identified, and vendors locked and loaded.

SSA’s operations planning group is involved in all marketing initiatives, assisting with time and motion studies, labor scheduling and program roll-out. The training group oversees employee education on new programs. Vendors and suppliers meet with the SSA team throughout the planning stage to ensure they can meet expectations. The result: By the time a new program reaches the stores, it has been fully vetted, minimizing the risk of failure.

No retailer is perfect, SSA execs acknowledge; any new program has its hiccups. But with its systems in place and massive network of company-ops, SSA can provide the consistency that others cannot. “Major oil’s navigation away from company ops and retail is our opportunity,” says Grant Heminger, vice president of marketing and a 20-year veteran of the company. “Anything we do, we’ll do well—or we won’t do it.”

Rich Haen, senior vice president of sales for Eby-Brown Co., Naperville, Ill., has overseen SSA’s account for their entire 15-year relationship. Over that time, he’s watched the retailer expand its focus from simply controlling costs to thoughtfully driving dollars.

“In the past, it was just load stores up and hope it sells,” says Haen. “Now, whenever they go out with a marketing plan, it’s well-thought-out, and their confidence of success is pretty high at that point. SSA knows the importance of being customer-driven in its marketing decisions.” Plumby agrees: “Seven years ago, there was a lot of gut feel [at SSA]. You’re shooting from the hip. But today, you can’t afford to do that. You’ve made some bad decisions, and you’ve lost that consumer to the guy across the street, and have got to pay dearly to get them back.”

That doesn’t mean that controlling operating expenses isn’t a sizable—if not equal—driver for SSA. Marathon Oil has targeted about a $1-billion cut in capital expenditures for 2010 compared to 2009; expenditure on the downstream business, which includes refining, marketing and transportation, saw its share of the budget fall from 38% to 22%.

“There’s a capital-allocation process that goes on throughout Marathon,” Kenney acknowledges. “Certainly the economic environment we’ve seen over the past couple years has dictated that a little more discipline around spending is the order of the day. We’ve had to do our part in taking a more cautious, disciplined approach to capital spending.”

For the retail group, the supply chain has offered ample opportunities to meet its targets.

“We dove into the supply chain really hard the last three to four years, because we believe that’s where a big piece of the cost is, as far as margins inside the store,” says Plumby.

“We’re looking at the store format and figuring how to get product in there quickly, most efficiently, so it doesn’t impede the customer. At the same time, through the whole recessionary period, we’ve gone back to major manufacturers and renegotiated deals, and really looked hard at cost structure.” “We are constantly working together to streamline the supply chain,” says Haen of Eby-Brown. “We have to get product to the stores in the most efficient manner in order to keep costs low.”

He cites two efforts by SSA’s operations team: moving to nighttime deliveries and consolidating DSD. As of press time, 85% of Speedway SuperAmerica stores were receiving nighttime deliveries. The company is implementing consolidation of DSD for bakery items, and it plans to expand this to dairy.

SSA’s seven regional directors are in charge of keeping operational costs in check, a feat the company has managed even in the midst of growing credit-card fees.

LOYALTY REWARDS

With SSA’s cost-cutting mandate, its embrace of loyalty—an endeavor requiring a high investment and delivering a murky return—has always been a tough sell to higher-ups. However, it’s one that the company will passionately make again and again.

“When looking at a loyalty program, it’s not cheap, and when you’re looking at trying to justify the ROI on that type of investment instead of building a store, that’s a tough call to make,” says Plumby, who declined to share SSA’s total investment costs on the program. “You have to be truly visionary to see the value of loyalty on your business. That’s where I applaud Tony—he was the architect behind this in Marathon years ago.”

As a former head of business development for Marathon, Kenney’s team built the business case for a loyalty program and designed its basic parameters a decade ago. The argument: that the newly formed Speedway SuperAmerica, with 1,600 company-owned and -operated stores, offered fertile ground on which to execute and control a loyalty program.

The company adopted a pointsearning, rather than a price-cutting, model for the program. This approach—more common with airlines than retailers—avoids directly discounting fuel, which doesn’t have the same sponsorship from vendors and stable margins as in-store categories. Customers earn points with each instore and fuel purchase, which they can then redeem for free merchandise or a discount on fuel.

“It was a very tough decision, one that was vetted for years, about which way you want to go—because you really can’t do both,” says Plumby. “We think we made the right choice because what we’ve found is customers value the points.” In 2009, the average active Speedy Rewards member made 77 trips per year to a Speedway or SuperAmerica site, compared to only 25 trips for a nonmember. The past year has proven how much customers appreciate value, and SSA is tackling delivery on two fronts: points and, to a limited extent, price. In 2009, it tripled the number of Speedy Rewards bonus items from seven to more than 20 across the entire year.

“The other side of the coin is because of our renegotiation on cost structures, we’ve actually rolled back some prices,” Plumby says. “Last October, we rolled back the cost on a 16-ounce cup of coffee from $1.09 to 99 cents. So we’re really trying to position ourselves into a value-oriented position to the consumer, and really driving it with the vendors to keep us in that position.”

That powerful retailer-vendor rela- tionship has cemented SSA’s preference toward a strong branding retail approach. So, while SSA has a stable of successful private-label products— Tourney cigarettes, Enon Springs bottled water and Shock Wave energy drinks and coffee, among them—the company believes wholeheartedly in the power of major brands.

“We understand the economics of private label; I absolutely understand those economics,” says Kenney. “But when talking about value, I think the major-brand products bring an element of value to that consumer, when they’re looking to get the most out of their dollar. … Around the Speedy Rewards program, it’s a great way to offer a major-brand product to a customer and give them a special offer on that product. That to me defines the next level of value.”

The company partners with about 20 top c-store brands in its Speedy Rewards promotions. Vendors compete for a set number of promotional slots each month. “The vendors bring X number of promotions to us, and we do the math,” says Plumby. “Whatever’s the best promotion for us and the vendor, we’ll choose. That way, it gets vendors really bought into the value of Speedy Rewards.”

Having a single Radiant POS system across the 1,600-store network, combined with a substantial data warehouse and Speedy Rewards, provide a powerful argument for partnership with SSA.

“That’s the thing in our business: You forever put money against certain items, and then run the numbers and basket on those items to find they are just not worthy of the marketing dollars put against them,” says Plumby. “That’s where we really run the math. Every promotion we do, we run the math on. That way we know the success rate. And if a vendor comes back to us and wants to do it again, I know if it’s a win for me and a win for him.”

Steve Swoboda, national account sales manager for PepsiCo Inc., Purchase, N.Y., says any Speedy Rewards promotion has to provide a specific value to SSA customers. “It’s really got to be something that meets the needs of what they’re seeing from loyalty trends—and a value package of what their shoppers want,” he says.

Pepsi is continuing a Mountain Dew Speedy Rewards program through 2010. While it is the first time that the vendor is running the promotion with SSA, projections suggest double-digit growth in single-serve Mountain Dew sales. Triple-digit growth on new products promoted as “bonus” items is common, according to SSA.

The promotional prowess of SSA extends beyond Speedy Rewards. The Hershey Co. began participating in the company’s two-for-$2.22 kingsized chocolate-bar program in March 2009, and it has seen dollar sales of king-size bars rise 23% since that time. Hershey also participates in multiple placements throughout the store, including a four-way rack, a rack that bundles with cappuccino purchases, and the two-tier sellingpoint counter fixture.

“SSA recognizes who their customer is and seeks to meet their needs,” says Tom Joyce, Hershey vice president of customer and industry affairs, via e-mail. “SSA is open to strategic ideas to grow the category from the vendor community.”

Although it has demonstrated its worth for the past five years, Speedy Rewards is considered still in its infancy. In 2010, SSA will continue to invest in the platform and make it easier for customers to use the card, accrue points and cash them in. Targeted marketing is the next step, according to Plumby. “At the same time, we’re going to get a lot more surgical with the customers out there, how we communicate with them and the programs we offer them,” he says.

“Anything you have at the five-year mark, you’ve got to take a step back and say, is it going to last another five years?” he says. “In these tight capital times, we’re able to get the money to drive Speedy Rewards to the next level.”

NEW GROWTH

From its origins more than 120 years ago as Ohio Oil Co. (which later purchased Transcontinental Oil, creator of the Marathon brand), SSA is the result of about 30 mergers and acquisitions. The 2002 purchase of Crystal Flash was the last sounding of this acquisition drumbeat.

But 12 years after the merger of Speedway and SuperAmerica, the company is a much leaner, more productive outfit. In that time frame, SSA sold off an entire market and all of its travel centers to Pilot Travel Centers.

It’s a significant shift in tactic, and one rooted in maximizing efficiencies.

“We went from a chain of 2,400 stores in 18 to 19 states with travel centers, to Midwestern, highly concentrated, with synergies around Marathon’s refining and distribution network,” says Kenney. “No truckstops, no fragmented shares in smaller markets we had in the Southeast. In my view, the success of Speedway Super- America isn’t about store count.”

That’s not to say SSA isn’t on the prowl for attractive corners. It owns 90% of the real estate on which it has stores, and it cherishes some of the best corners in its markets.

“All of the Midwest markets we’re in still have great growth opportunities,” says Kenney. “We have to have our realestate people out there always trying to assess what’s this going to be like in three to five years.” While Speedway and SuperAmerica footprints vary from 1,000 to 4,000 square feet, new builds have a common cut: 3,900 square feet on a large lot with six to eight MPDs.

“It has to make sense,” says Heminger. “Old Main and Main is still a strong position for us, as well as fringe suburbs. It’s just finding that piece of property ahead of your competitor, building when the time is right and being very careful in your selection because you don’t want to delineate the rest of your chain just because you own that piece of property and want to build on it.”

At the same time, SSA is continually rationalizing its portfolio of sites, trimming those that no longer fit the mold. As recently as 2008, the company sold off 15 Illinois stores to Alimentation Couche-Tard, which frequently pops up as a rumored acquirer of SSA itself.

While major oil’s sale of retail assets may hang in the distance like a dark cloud over SSA’s future, executives shrug off such speculation. Rather, they’re focusing on delivering a consistent customer experience.

“If we get it right and aim at the customer experience with as consistent an offering as we can do, there’s still leverage and market share there,” says Heminger. “We have not seen our top potential yet.” —Additional reporting by Bill Donahue and Mitch Morrison

An Amazing Race

More than a decade after the merger of the Speedway and SuperAmerica brands, SSA has truly forged its own retail legacy. In this profile you’ll find more on SSA’s:

Speedy Rewards loyalty program

Reliance on numbers instead of gut

Cost-cutting prowess

Ability to craft winning promotions

Future growth plans

ADDING AND SUBTRACTING

Foodservice. SSA’s 7th Street Deli sandwich line is a focal point in each Speedway and SuperAmerica store, complementing a substantial roller-grill program. In 2010, pizza will become a permanent part of the lineup after a thorough test in 2009. It’s a long way from the company’s former, QSR-centric approach. “From an evolution standpoint, it’s fair to say we rented out the food program before we realized, ‘We have our own real estate— let’s consider doing our own private label,’ ” says Grant Heminger, vice president of marketing for SSA. Speedway SuperAmerica has partnered extensively in the past with QSRs such as Blimpie and Subway, but it has since whittled those leased sites down to 21.

Tobacco. Competitors describe SSA as consistently aggressive in its cigarette pricing. “We’ve taken a position over the years on cigarettes and held forward, whereas other retailers may have blinked,” says Glenn Plumby, SSA vice underindexed in OTP five years ago, it has since prioritized the category and seen its share of sales grow, execs say.

Franchising. SSA has a legacy of about 70 franchise locations that originated from the SuperAmerica side of the merger. They were targeted at small towns within major markets where a company-op could not be justified but a franchisee could easily make the numbers work. While major oils such as BP and Chevron have embraced the franchise model, it’s a piece of SSA’s business that is continually under review thanks to its company-op focus.

Financial services. SSA is finalizing its approach to financial services and plans to “latch on and ride hard” in 2010. “That’s another opportunity for us to find additional revenue and margin dollars,” says Heminger, “some way to leverage our piece of real estate to generate further revenue to make up for reduced cigarette sales 10 years ahead. We have to look at every inch of that property and evaluate what can be a game changer for us, but get the math right and make sure it’s executable and repeatable.”

Car wash. The company has a smattering of car washes, predominantly in Minnesota, another legacy of the SuperAmerica brand. It’s a business that overall has been hammered by the drop in consumers’ disposable income, says Plumby. “ROI is very, very difficult to justify,” he says. “You have to look hard at the conversion of [customers] going through that wash and inevitably parking and going inside. To offer a price point to entice the customer means you have to buy something else from us. Getting them to park and come inside—that’s a difficult proposition.”

MIRACLE WORKERS

Speedway SuperAmerica’s culture embraces the power of people: employees, customers, suppliers and the community.

“I’m proud that we as a company have always found a way to treat our employees right—to do the right thing by our people,” says Tony Kenney, SSA president. “We’re fortunate that over tough times we have not had to do anything drastic in terms of laying people off. To be fair to people, treat them with dignity and respect, create a safe work environment: Those are responsibilities I take very seriously.” As a part of Marathon Oil Corp., SSA follows the corporate philosophy of giving back to the communities in which it does business. It’s been doing its part through an 18-year affiliation with Children’s Miracle Network, a nonprofit that raises money for 170 children’s hospitals throughout the United States. For SSA, the appeal of the CMN choice is that donations go directly to local hospitals. “It’s something our employees embrace with fund-raising programs throughout the year,” says Kenney. The money employees generated in 2009—$4.5 million—beat the previous record contribution in 2008, despite the tough economic environment. “It really is the culture of the company—how we care, our customers care, our responsibility to the community, how we deal with business partners, the ethics and integrity. That’s the kind of company I want us to continue to be.”

Competitive differentiation:A sophisticated loyalty program combined with a mathbased, profit-first approach to all marketing decisions makes SSA a retail powerhouse. While SSA has about 800 different store formats thanks to its acquisition background, it aims to bring consistency to its retail offering, with customer service the next big project.